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10 DECEMBER 2018
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Wednesday, 21 November 2018 15:16
Fintech M&A at record levels
Multiple challenges affecting all FS companies – but technology is the greatest

A new report from international law firm Reed Smith is showing FinTech M&A at record levels, brought about by a number of factors. As the financial services sector undergoes a technology-driven metamorphosis, competition is fierce, both between the mega companies, and from new companies fighting to enter the arena.

There are challenges from highly-publicised security breaches, heightened regulatory oversight and obligations plus more stringent capital requirements which are forcing the industry to radically rethink its entire structure.

But the three challenges of information security, regulatory demands and more stringent capital requirements pale in comparison to the transformative power of technology says the report.

FinTech is fundamentally changing financial services. Nimble disruptors in the form of innovative start-ups have been joined by the world’s largest technology companies as they seek to take market share from incumbent financial services providers.

Consumer demands

Digital native customers have exacting demands and many financial services businesses – from banks and insurers to private equity firms and family offices will not be able to meet them.

Organisations will need to consider acquisitions and investments to secure access and exposure to the technologies and skill sets required to operate successfully in the marketplace of the future, says the report.

They should also consider geography.
Among banks and nancial institutions, 40% pick Singapore as likely to rise to global prominence as a ntech hub over the next two years, while 34% pick Munich. Private equity, venture capital and family o ce respondents also choose these two cities, but in reverse order, with 48% going
for Munich and 33% singling out Singapore. Alternative choices, including Amsterdam, Stockholm and London, also attract notable numbers of recommendations.

Both Munich and Singapore have certain advantages over their rivals, particularly their status
as signi cant nancial services aside from ntech. Both have also invested in local initiatives designed to attract ntechs – for example, with regulatory support in Singapore and municipal assistance in Munich, which is also bene ting from the rising cost of rents in Berlin, which has previously attracted many start- up businesses.

Nevertheless, these cities will
not have an easy ride. London, in particular, continues to ght to retain a prominent role – not least with the e orts of the Financial Conduct Authority (FCA) to provide a regulatory sandbox in which ntechs can experiment with new solutions. Amsterdam, meanwhile, hopes to be a beneficiary of Brexit in a broader nancial services context, including ntech, while Stockholm’s attractions include high standards of living and
a supportive ecosystem for start-up enterprises.

Digital currencies

Among banks and nancial institutions, 40% pick Singapore as likely to rise to global prominence as a ntech hub over the next two years, while 34% pick Munich. Private equity, venture capital and family o ce respondents also choose these two cities, but in reverse order, with 48% going
for Munich and 33% singling out Singapore. Alternative choices, including Amsterdam, Stockholm and London, also attract notable numbers of recommendations.

Both Munich and Singapore have certain advantages over their rivals, particularly their status as signifcant financial services aside from fintech. Both have also invested in local initiatives designed to attract fintechs – for example, with regulatory support in Singapore and municipal assistance in Munich, which is also benefiting from the rising cost of rents in Berlin, which has previously attracted many start- up businesses.
Nevertheless, these cities will not have an easy ride. London, in particular, continues to fight to retain a prominent role – not least with the efforts of the Financial Conduct Authority (FCA) to provide a regulatory sandbox in which ntechs can experiment with new solutions. Amsterdam, meanwhile, hopes to be a beneficiary of Brexit in a broader financial services context, including fintech, while Stockholm’s attractions include high standards of living and a supportive ecosystem for start-up enterprises.

Who is your rival?

More than three-quarters (79%) of banks and other nancial institutions regard one another as their biggest source of competition for ntech acquisitions and investments. Significantly, however, these respondents are also likely to expect competition from beyond the nancial services sector: almost half (45%) regard the giant technology companies as potential rival bidders.

Private equity, venture capital and family o ces are more likely to see their peers as the competition. Here too though, signi cant numbers are eyeing rivals outside of financial services, with 39% picking out the big technology companies as likely competitors in a transaction.

“Fintech acquisitions are on the agenda of most nancial and technology companies this year,” says the managing partner of an Australian venture capital firm. “It is going to be tough to acquire your desired targets given this competition, particularly at a fair valuation.”

More than two-thirds of financial institutions (70%) worry about their ability to integrate new technologies into their existing mainframe or platform, suggesting that pre-deal work needs to centre on how to marry legacy IT infrastructure with the tools and solutions being acquired.

Similarly, almost half of financial institutions (49%) in this research regard discerning integration challenges. Again, the key to addressing this issue lies in pre-deal planning. Acquirers and investors need to set clear targets for post-deal performance and build measurement structures that provide visibility and transparency about how those targets are being met.

The final piece of the jigsaw will often be in bringing the new technology or solution to market. This will require investors and acquirers to meet a range of challenges. More than half worry about building customer acceptance for new products and services, while banks and other financial institutions in particular worry about the coherence of the international regulatory frameworks in which they must operate.

M&A

KPMG research suggests global FinTech M&A during 2017 was up sharply compared with 2016, itself a record year. In total, there were 336 such transactions last year worth a total of $18bn – that compares to 236 transactions worth $11.15bn over the previous 12 months.

These deals spanned a broad range of sub-sectors, including payments, blockchain, banking, lending, InsurTech (insurance based technology) and RegTech (regulation-based technology).

They also included a series of megadeals, including the largest transaction of all, the $11.6 billion purchase by credit card processing company Vantiv of its British rival Worldpay.
 
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